Companies with international exposure face two main risks. The first is that the country in which they are trading goes into recession (or some kind of major downturn), and the second is currency fluctuations.
I want to look at three companies in the FTSE 100 that should actually benefit from a growing US economy, and a lift in the value of the US dollar.
The case for more US growth
The United States has benefited from years and years of ‘cheap’ money from the Federal Reserve. Quantitative easing and a boom in the share market has seen a pick-up in growth that began tentatively in 2013 and has picked up pace in 2014. According to the second estimate released by the Bureau of Economic Analysis, the US economy grew at an annualised 3.9% in the third quarter of 2014 — that’s above trend. Consumer spending increased 2.2% in the third quarter. The services sector also expanded 1.2%.
This week we also learned that policy makers have been able to keep the US unemployment rate at 5.8%.
I have my doubts about the sustainability of this US recovery. Indeed history tells us that recoveries like the one we are witnessing right now are usually interrupted with another significant fall in industrial production, but the present reality is that the economy is growing again. Investors can take advantage of that as you’ll see below.
The mighty US dollar
Companies often have currency hedging policies in place to safeguard their offshore earnings. Obviously if the currency of the country the company is trading in falls dramatically, earnings will be negatively affected. Firms usually take out ‘insurance’ against this. What if the currency starts to appreciate though over the longer term? If this appreciation in the currency coincides with an overall pick-up in aggregate demand with the country, firms trading within that market can see their valuations start to rise.
North America accounts for around 30% of Diageo’s (LSE: DGE) (NYSE: DEO.US) net sales, and around 45% of its operating profit. The beverage trader has had its setbacks (including disappointing sales for Smirnoff vodka), and it’s still recovering from a spending spree instigated by former CEO, Paul Walsh, but analysts accept that the medium-term outlook for Diageo is good. Specifically, City folk cite Diageo’s extensive product portfolio as a reason for it to perform soundly in America in 2015.
Africa is also a great source of revenue for the beverage maker. According to the African Development Bank, there will be 65 million more legal drinkers in Africa by 2023. Diageo’s already throwing more than £1 billion at this market.
North America accounts for around 12% of SABMiller’s (LSE: SAB) earnings before interest, tax and amortisation. The bottler will therefore benefit from further growth in the US in a similar way that Diageo with benefit from it — increasing market reach, combined with growing consumer demand.
In addition, international ratings agency Fitch also cites several reasons why SABMiller is now standing out from the pack. Fitch says the firm’s debt position has improved following the acquisition of Foster’s, and the company is also set to benefit further from its exposure to developing markets. Fitch also likes the look of SABMiller’s $500 million cost-cutting programme. If that wasn’t enough, the company’s tie-up with The Coca-Cola Company in Africa, Coca-Cola Beverages Africa, should deliver synergies for SABMiller making it quite attractive in 2015.
AstraZeneca (LSE: AZN) (NYSE: AZN.US) will not only benefit from further economic growth in the US and an appreciation of the US dollar, but it is also proactively, even if slowly, pushing further into this growing market. AstraZeneca’s latest results were encouraging: ‘Brilinta’ sales were up 78%, there was a strong launch of ‘Farxiga’, and it recorded ‘Symbicort’ growth of 26%.
In addition, just as SABMiller enjoys market share growth in Africa, AstraZeneca is benefiting from increased sales activity in China. The drugs makers recorded a growth injection of around 22% from China in its latest results.
The companies mentioned above all stand to gain in 2015 from a growing US economy, an appreciation in the greenback, and increased trading activity in emerging markets. No investment is guaranteed but these stocks are all worth a closer look for those seeking some growth next year.
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